BI urged to slash interest rates
JAKARTA (JP): An improvement in public confidence of the rupiah in the past several days has created better momentum for Bank Indonesia (the central bank) to ease its tight monetary policy, businessmen and analysts have said.
Sofjan Wanandi, chairman of the Gemala Group, said yesterday that improved public confidence made rate cuts much more feasible.
"I think now is the right time for Bank Indonesia to cut its rates," he told The Jakarta Post. "Unlike in the past, a cut in interest rates is less risky."
The rupiah has been improving in the last few days on the government's announcement last week that it would seek financial aid from the International Monetary Fund (IMF).
A team led by IMF officials was in Jakarta to discuss the aid, but Minister/State Secretary Moerdiono said yesterday that government officials and the team had not talked about the amount of aid needed.
The rupiah was steady against the dollar yesterday in slow trading, closing at 3,470/3,500, compared to an opening of 3,450/3,500.
Sofjan said that keeping interest rates at current levels would devastate the already weak business sector. He estimated that many companies would collapse if the central bank maintained its credit crunch policy.
He said that the government's tight monetary policy had severely hit almost every business, not only due to expensive loans but also because of a sharp decline in orders and sales.
"Contractors have lost at least 30 percent of their orders, the automotive industry has been cutting shifts, food companies have had the same experience suffering a 30 percent decline in sales, while supermarkets and tourism have lost about 30 percent of their revenue," he said.
He feared that if the government maintained its monetary policy, the impact would not only cause economic difficulties, but also social problems.
Bank Indonesia raised its benchmark interest rates to as high as 30 percent on Aug. 19 as part of measures to shore up the falling rupiah.
In late September, the central bank for the fourth time lowered its interest rates on one to three-month SBI papers to a range of 17 percent to 21 percent, from 18 percent to 23 percent.
But Sofjan said the interest rates were still too high. "If the SBI rates are maintained at a level of between 17 percent and 21 percent, the deposit rates would stay high at 30 percent and the lending rates would continue to hover between 30 percent and 40 percent."
No companies would be able to survive with such high rates, he said.
Laksamana Sukardi of Reform Consulting Group shared the same view saying the prolonged tight monetary policy could backfire on the country's economy.
"It's the right momentum now to loosen the tight monetary policy because the rupiah has already reached an appropriate level," he said.
Laksamana said the monetary measures could cause an economic recession.
Chief economist of Danareksa Sekuritas, Rino Agung Effendi, acknowledged that high interest rates were crippling business activities, but said that a move to cut rates could further spur currency speculation.
"The loosening of the tight monetary policy should be simultaneously introduced with the announcement of the IMF financial package," he told the Post.
Rino argued that if the government ended the tight monetary policy by lowering interest rates, the rupiah would again become a target for speculators rushing for dollars. (aly/hen)